Arabs dispute IEA on oil price surge to $150

Prices to spur further innovation that might improve supply

An official Arab oil investment group has disputed a scenario by the International Energy Agency (IEA) that oil prices could surge to $150 a barrel within the next five years due to rising costs and lack of energy investment.
 
The Saudi-based Arab Petroleum Investment Corp (Apicorp), an affiliate of the 10-nation Organization of Arab Petroleum Exporting Countries (OAPEC), outlined its views in its latest monthly commentary, sent to Pipeline.
 
It said recent research studies conducted by international policy-advisory institutions have raised the prospect that severely constrained supply growth could drive long term oil prices much higher than previously assumed.
 
It cited a study by the Vienna-based IEA that with lingering socio-political turmoil in the Middle East and North Africa (MENA), a shortfall in investment in the upstream sector could shift output to higher cost sources resulting in real oil price peaking to $150 per barrel within the next five years
 
Other institutions, Apicorp, added, have reported similar trends even assuming that higher oil prices would spur further technological innovation that might improve supply. This is the case of the IMF which has empirically evaluated a model of the world oil market, which encompasses both the geological view (resource constraints determining future output and prices) and the technological view (higher prices encouraging technological solutions), to forecast a permanent doubling of real oil prices to $200 per barrel within 10 years.
 
According to Apicorp, finding and developing oil depends on politics, which is a powerful motivator of policy. In some producing countries such policies have been rather restrictive in terms of either access or taxation, it said.
 
In contrast, motivated by concerns about security of supply, key consuming countries’ policies have generally been more supportive. In these countries, notwithstanding stricter environmental regulations, fiscal incentives and appropriate public and private financing mechanisms have, on balance, greatly contributed to growing investment and output, the report noted.
 
Cost inflation, it said, is a major factor in project economics, adding that the nearly tripling of the cost of energy projects, observed during the last decade or so, has been largely due to rising prices of input factors, contractors’ margins and project risk premiums. Such a trend, however, is unlikely to endure, it stressed.
 
“As the industry continues to experiment with new technologies and innovates with contracting and managing large-scale projects, we should expect it to shorten the learning curve and reduce costs,” Apicorp said.
 
“To sum up, marginal cost – or to be precise its proxy – can hardly be predicted due to the combined effect of highly uncertain factors. But uncertainty does not justify the anticipation of higher costs. On the contrary, it can lead to the opposite result. In other words, technology, politics and economics can also
 
combine auspiciously to lower marginal cost, therefore lending support to moderate long term oil price.”
 
The study said it believes that as global oil demand increases, even if only moderately, and production from mature areas declines, finding and developing additional oil will definitely be more challenging in the future.
 
“However, the view that marginal cost, which drives long-dated price at the back of the forward curve, should increase to stimulate additional supply is not immediately plausible,” it said.
 
“Despite (or because of) all the uncertainties, the likelihood, based not on empirical data but on reasoned judgment, is that rising marginal cost,and therefore long-dated price, may not be inevitable.”

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